Some Facts About Inflation in India

Some Facts about Inflation in India

Rising Inflation has been the cause of concern for various emerging economies like India & China & other Asian peers. Sparing no segement of the economy & Indian society, it has badly hit the

· Spending power of Indians

· Investment Scenario in India

· Saving Culture in India

What is Inflation???

In simple words, Inflation is the general rise in the price level of goods & services in the economy. To put it in layman’s language, Inflation reduces the real value of money.

For Example - Ram had a monthly income of Rs 25000 & his monthly expenditure is Rs 15000 & he is use to save & invest Rs 1000o per month out of his monthly salary. Now, when we go into the market & buy food & vegatables for his family. He found the price level of food articles to be more than 10% than the previous year. Now considering no increase in his monthly income salary his monthly Expenditure increases by Rs 1500 i.e Rs 16500 & the left over money of Rs 8500 remains available to him in the form of Investments & savings as against Rs 10000 earlier.

How to measure Inflation

Inflation is normally measured by WPI data taking into consideration a given set of 435 commodities from agriculture to industrial commodities. The another way to measure Inflation is Consumer Price Index (CPI) whih is followed by other developed economies of the world. So when you read 7% Inflation rate in newspaper, it is actually referring to WPI

What Causes Inflation

Some major causes of Inflation are

· Loose Monetary Policy by reducing CRR (Cash Reserve Ratio)

· Increase in Production costs because of high input prices

· Decrease in Exchange Rates

· High prices of crude oil at the International level

How to beat Inflation

· During the times of high inflation rates, the savings returns turn negative as the real value of Rs 100 today would be Rs 70 after 5 to 7 years considering 5-7% inflation rates. So, I would suggest you to invest somewhere may be in balanced funds if you are conservative investor or invest in equity funds if you are a young & aggressive investor

· During the times of high inflation rates like 10-12% during the recession times of 2008, it becomes very important to time the market as the equity market always try to over react to the inflation concerns in any economy that may be developed or developing.

· You may wait for interest rates to go up & lock your investments at high interest rates

This article is written by Mayank Gupta, Founder at Wealth Bazaar Financial Managers http://www.wealthbazaar.in/., a wealth management company. He is MBA (Finance) & can be reached at info@wealthbazaar.in

Inflation will drive Fixed Deposit Returns in the Coming Future

 

Inflation will drive Fixed Deposit returns in the Coming Future

Right now the average annual inflation in India is 10-12% per annum while the Bank Fixed Deposits are earning just 7-8% annually and PPF and GOI Bonds are earning just 8.5% returns per annum.

So theoretically speaking, Bank FDs, PPF & GOI Bonds are safe investments but in reality they are not particularly right now. Because the inflation is higher than the returns offered by these fixed income instruments.

So actually right now you are losing money on your fixed income instruments. In fact, you are earning –2.5-4% (Negative) returns on your PPF & GOI Bonds right now.

It means that your wealth in these fixed income instruments is right now shrinking even though you think that it is growing at the safe rate. Your wealth is shrinking in the terms of the purchasing power.

And that’s why I personally feel that very soon, the banks and government will raise the interest rates on these fixed income instruments (And if not than they should..!!!).

Ideally the returns from Fixed income instruments should be 2% higher than the rate of inflation. So ideally right now in India the returns from Bank FDs should be 12-14% (As the inflation is 10-12% per annum) per annum.

Government should seriously raise its key interest rates. Otherwise, people who are living on fixed income instruments or planning to live on fixed income instruments after their retirements will suffer. Their retirement won’t be peaceful financially.

Inflation Rate in India is touching the Sky

[Image Source: Hindu.com]

Inflation Rate in India is touching the Sky

Inflation rate in India is rising day by day. Through out the year 2010, the Inflation rate in India has fluctuated between 8-14%. Now, this is really a very high inflation rate.

Food prices are rising which is making the basic food items simply un affordable to the lower class people.

The main reason behind rising this inflation rate is government monetary policy. And there is also an effect of US Government monetary policy on it.

As the western world is printing billions and trillions of dollars out of thin air, this newly printed money is flowing into the emerging economies like India and China and shooting up the prices of all the assets.

And because of this the inflation rate is also hiking like anything.

As I have already told you in several of my previous articles that since 1971, the world has removed the gold standard. Means the modern money is Currency (Also known as ‘Fiat Money’) which is now backed by any gold.

Thus, this means that the governments and central banks from all around the world can print as much amount of money as they want. And every time they print new money, it dilutes the purchasing power of the existing money in the economy.

If the inflation rate remains in 2 digits (Above 10%) than PPF, Bank FDs, Post-office Savings schemes and other Fixed income instruments become worthless.

This is because inflation erodes the purchasing power of the existing money in the economy.

Indians need to be financially smarted and well-educated now. Only financial education can teach you that how to beat the inflation by investing your money wisely. So what are you waiting for? Start learning basics of investing now and beat the inflation like rich people.

Inflation Rate in India 2010

[Image Source: Sulekha.com]

Inflation Rate in India 2010

RBI has tighten its monetary policy to control the higher inflation. In September 2010, overall inflation in India was 8.62% which was much higher than the RBI expectations.

And that’s why RBI is planning to increase the various key rates to cool down the inflation. Hopefully by December, 2010, the inflation rate will come down to 6%.

Food inflation was 13.75 per cent for the week ended October 16. It has remained in double digit for the past three months.
RBI also noted that credit to non-food sectors was healthy, although loan disbursals to the agriculture sector had declined.

Inflation is a silent wealth killer. It shrinks the purchasing power of your wealth silently and that’s why saving money is the worthless financial advise now. You should save and invest your money in the modern world.

You should invest your money in assets which give you at least 2% higher returns than the inflation rate. So according to the current inflation rate (8.50%), you should invest in assets which can give you 10%+ annual returns.

And that’s why fixed income instruments like PPF, Bank FDs, Post-office savings schemes…etc.. are practically worthless. Smart investors invest their money in private businesses, web properties, equities and gold to beat the inflation.

So be a smart investor and invest your money in higher growth assets. PPF, bank FDs and Post office savings schemes are no more safe because inflation erodes the purchasing power of your money parked in these fixed income instruments.

Inflation Rate in India 6.5% by 2011

Inflation Rate in India 6.5% by 2011

The inflation rate in India will hopefully touch 6.5% which is right now around 12-14%. Because of the Currency wars between USA and China, India has noticed huge capital inflow since past several months.

All of this flood of capital inflow is the newly printed money out of thin air by the US Government which is entering into the emerging markets shooting up the Sensex and other asset markets to the sky high.

And this high inflow of foreign capital is causing the inflation in India. Unfortunately, up to now the RBI and Government of India has not regulated this capital inflow.

But in my opinion, they should control this flow of capital inflow like other countries such as Brazil and Thailand to stop ballooning the equity markets.

This is because if the RBI won’t control this capital inflow, it will shoot up the inflation like anything.

Again the most affected people will be employees who are living on paychecks and pay the highest tax to the government. People who own their own businesses and use the power of the corporate structure won’t be affected much because by using the power of corporate structure, they will pay less in taxes.

And yes, these are the people who higher other people (Employees) to run their businesses. And that’s why they won’t be affected much.

Now, let us see that weather the inflation cools down to 6.5% in 2011 or not?

If you want to learn the power of corporate structure to protect your wealth from inflation and higher taxes than download and read my FREE eBook – My Journey To Billionaire Club.

The Fed Wants to Boost Inflation

The Fed Wants to Boost the Inflation

The Federal government has made very clear that it wants to boost inflation by keeping interest rates at ground zero levels and printing more and more money.

This is because according to Fed, some amount of inflation will help to reduce the unemployment rate in the USA which is sky high right now.

The US Government has now two choices – Inflation or Employment.

If it will keep the inflation under control, the unemployment rate will hike and if it want to reduce the unemployment rate than it will have to boost the inflation.

The yield on the 10-year Treasury note, a benchmark for mortgage rates and other long-term rates, slumped to a two-week low of 2.60% by 12:45 p.m. PDT from 2.70% on Monday. The two-year T-note yield fell to a record low of 0.43% from 0.46% on Monday.

The Fed tweaked its post-meeting statement to say that “measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”

The Fed thinks that the inflation rate is still lower than their expectations and this is the reason it want to boost the inflation more to reduce the unemployment rate.

The Inflation will Skyrocket in 2011

The Inflation will skyrocket in 2011

The Federal Government has manipulated its money supply since years.

It has shoot up its monetary base (Money supply) from $ 800 Billion to well above  $ 2000 Billion ($ 2 Trillion). And all of this money is printed out of thin air only.

And that’s why now there is a fear of higher inflation in 2011. The price of goods and services in the USA and all around the world will skyrocket in the year 2011.

The goods and services will become more costlier. And unfortunately, the salaries of employees will not rise in comparison to the inflation. And this is the major reason, people who are working hard at their job place and live paycheck to paycheck will become financially poor.

Now, let us see that what will happen in 2011? US Government has two choices – Inflation or Employment.

Buy Art During Inflation

Buy Art During Inflation

Art is one of the most precious asset class on the earth. One art involves literally hundreds of hours of mind labour work of the artist and this mind labour work makes it valuable. Art is the asset class which has beaten the inflation very well.

The US Government is printing more and more money day by day. And that’s why sooner or later it will suffer the hyperinflation means rising in prices. And Art is the Best Investment that can beat the inflation very well.

What I advise you is that, if you have spare money than rather than keeping it in Cash, just buy an art from it. Well, buying an art doesn’t mean that you buy millions of dollars of paintings. It can be a $ 100 of Sketch also on the A4 size of paper. The art can be worth of anything. It ca start from few hundred dollars to literally millions of dollars.

Just visit the eBay and see the collection of art for Sale on it and buy a nice peace of an art from it or visit your local art gallery and buy some good art for you.

Art can beat the inflation very well. Keeping money on hand is a Fool’s plan because the inflation will erode its value over the time and make it worthless in the long run. While art is something which will appreciate in its price year after year forever.

So Invest in Art…!!!

Best Bonds to Own in Inflation

Which are the Best Bonds to Own during Inflation?

There are basically two varieties of Bonds – Government Bonds & Corporate Bonds.

As a rule, The Government Bonds are safer so it is advisable to own the Government bonds. However, during the time of inflation, it is advisable to prefer those bonds which give you at least 2% more return than the rate of inflation. Weather its a government bond or it’s a corporate bonds.

This is because the Actual Return = Return offered by Bonds – Inflation.

Say for Example, if the Inflation is 4% and some bonds are giving you 6% return than the actual return will be +2% but if the inflation is 8% than the same bonds will give you –2% return. So at that time it is advisable to invest in those bonds which give you at least 10% return.

Thus, the choice of bonds is mainly depending on 2 factors.

01) Rate of Inflation

02) Bond Rating

Yes, The second thing you should check is the bond rating. Usually AAA and AA Rating bonds are advisable for the investments. Lower the bond rating, higher will be the return but the higher will be the chance of default and vice versa.

So the choice of Best Bonds to Own in Inflation depends on the two key factors – Inflation Rate & the Bond Rating…!!!

Inflation & FD Interest Rates

Recently a reader has asked me the following query and that’s why I thought to answer this query.

Dear Sir,
Kindly inform us Why nowadays bank FD interest rates are decreasing? What is the reason? Some time FD interest rates are 8 to 9% and now 6% per year
Reader

Well, See. The FD Interest rate depends on the rate of Inflation. Usually Interest rate is adjusted 2% higher than the Inflations. Previously Inflation was around 6% and thus the interest was 8% that was fairly good. But in the year 2008, in India the Inflation was 12%. Now at that time the interest rate was only 9-10% that was 2% below the Inflation. That was a bad thing.

But now, in India the Inflation is just 1.5% when I am writing this article. Since last 3 months the Inflation was negative (Deflation). So to keep adjust with Inflation government and banks are reducing Interest rates on FDs to 6%.

NOTE: Today’s 6% Interest rate is much better than yesterday’s (Few month before) 8-9% Interest rate. Because Today’s Interest rate is +4.5% higher than the Inflation while previously The Inflation was was 10% and the Interest rate was 8-9% which was just 1-2% higher than the Inflation which is not a good thing for the Investors.

In Layman’s Explanation – Why Inflation rate is so important?

Well, see. The above was somewhat heavy explanation. Now, let me tell you this in layman’s (My Favourite) Language.

See. Inflation is the Silent money killer. Inflation will erode the purchasing power of your money over the time. The problem with inflation is that you and me can’t see it with our eyes. But we have to see it with our minds.

Say for Example, You have Rs.100 in your pocket today and the inflation rate is 10% per annum than after 1 year, you will have the same Rs.100 in your pocket. So with your eyes, you will see the same 100 rupees in your pocket. But because of the Inflation, the purchasing power of your Rs.100 after 1 year become today’s Rs.90 only.

So if inflation is 10% than it means that after a year you will be able to buy only 90 rupees of products and services in the economy as that of today.

Thus, the real return from any asset = Return – Inflation.

Suppose if the stocks give you 15% per annum return in the long run and the average inflation in the long run is 5% than your real return from the stocks is just 10%.

The same is true for FDs. If your FD is giving you 10% return and the inflation is 8% than your real return is just 2%. Today your real return on FDs is + 4.5% because inflation is just 1.5% and FDs are offering 6%.

One year back (2008), the scenario was more worst. FDs were giving you 10% return and inflation was 12% so your real return was –2%. Yes, You were actually loosing money from your FDs.

Anyway…I hope this much information is useful to you.

Well, I am right now working on to prepare a story for your daughter who is in first standard and still reading my blog. The story will help her to change her mindset about Money since childhood. I will publish it soon as soon as I will prepare it. (Probably 1 week or a two). Kindly send me your e-mail address to my e-mail ID. I will inform u as soon as I will publish the story….!!!!

Inflation Proof Assets

Which are the Inflation Proof Assets?

Recently the US Federal Government has printed $ 1.2 Trillion out of thin air only and pushed it into the economy. And that’s why now the Investors all around the world are fearful. Because sooner or later, Hyperinflation will set which will erode the purchasing power of all the reserved money and Cash.

And that’s why Investors worldwide are searching for inflation proof assets. So Here is a List of Inflation proof Assets.

01) Gold – Traditionally Gold has strong negative correlation with the Dollar. So more the US Government prints Money, the Gold price goes higher that much. Since last more than 5 centuries, Gold has beaten the inflation very well. In fact, Gold is the Best Inflation proof asset and a safe heaven for your money.

02) Private Businesses – Yes, The Best thing is to own Private Business. It is better to invest in your own private business rather than keeping cash on hand with you. I know that during the time of recession, Businesses shrink in their size and profits but still they can beat the inflation. The money that you have invested in your own Business will be well protected from the inflation/

03) Equity – Yes, In the long run, Equity beats both the Inflation & Tax – the 2 silent money killers of the money. In the short run (Less than 5 years), Equity is volatile but in the long run, it has outperformed any other Asset class in this world. Money Invested in Equity for more than 10 years are well protected against the Inflation.

04) Web Properties – Internet Assets are the new asset class but they are well protected from the heat of inflation. Say for example, take the example of this Blog. This Blog is my Internet Business and the money invested behind this Blog are well protected from the inflation in the long term. The money which I invest behind creating a great content for the readers of this Blog will reflect in the web traffic increase, revenue increase and the Blog Valuation increase.

This, all of the above are the Inflation proof assets. So Invest in them and protect your money from the Inflation.

Inflation & Return on Assets

Inflation & Tax both are the silent money killers. Inflation will erode the purchasing power of your money over the time. Because of the inflation, the purchasing power of your money reduces over the time.

The problem with the inflation is that, you can’t see it. And that’s why most of the people believe that their money in Fixed deposits and government bonds are safe. But well, your money in fixed deposits and other fixed return instruments are not totally safe. Because the inflation eats up its purchasing power over the time.

The Real return on any asset is = Return offered by Asset – Inflation

So now, suppose GOI Bonds are giving you 8% annual return and the inflation is 5% per annum than your real return on the asset is (8-5) just 3%.

Now, let us talk about Deflation. Deflation means negative inflation. During the time of Deflation, it is better to become a lender (Bond Holder) rather than a borrower because the purchasing power of your money increases because of the deflation.

Right now, Indian Economy is in deflation. It means that, the current inflation in India is –1.5%. So Actual return on GOI Bonds is (8 – (-1.5)) = + 9.5%. That’s good.

During the time of Deflation, The negative inflation works on the Asset in favour of its owners and make them richer.

Thus, Inflation works on your Assets in negative direction. Your Assets work in favour of you to make you richer but the inflation works against your assets to reduce its over all real return. And that’s why before investing, one should carefully count the real return from the Asset…!!!

How Inflation Works?

This article is all about What is Inflation & How it works in Layman’s language. I will not use any sophisticated financial terms here to describe inflation. I will not use any Wikipedia or Investopedia definitions to describe Inflation Here.

So What is Inflation in Layman’s language?

Well, Inflation means reducing the purchasing power of your money over the time weather because of the cost of goods and services in the economy go higher or because government prints and push more money in the monetary system which dilutes the purchasing power of the existing money.

Why Inflation takes place?

Well, the most common reason why inflation takes place is, Because Government prints more money. After 1971, Money did not remain derivative of gold any more. Modern money is not backed by Gold anymore. Modern money is a derivative of Debt. Whenever, you, government or businesses borrow money, the new money is being created in the economy and this new money dilutes the purchasing power of the existing money. Thus, the Modern money is known as Currency.

What happens if Inflation goes very high (Hyperinflation)? -

In the history few times, this type of scenarios happened where Economies of different countries suffered from Hyperinflation say for Example, Germen Economy in 1923 and Zimbabwe economy in Year 2008.

See the above photos of Zimbabwe Hyperinflation. When the hyperinflation sets in, The Notes of Lower denomination disappears and the government forced to print notes of higher denominations.

See in the above photos, You can buy 3 eggs for 100 Billion Zimbabwe dollars. This is the Example of Inflation going through roof (Hyperinflation).

What are the advantages of Hyperinflation?

Well, Hyperinflation is advantageous for intelligent investors and business owners who have taken a huge amount of debt to fuel the growth of their businesses. If hyperinflation sets in the economy, Businesses & Smart Investors will pay off all of their debt with the inflated currencies and get out of the debt easily.

Currently US Government is in huge debt and it has printed literally $ 1 Trillion in the economy. Thus, sooner or later hyperinflation will set in the US Economy and USA will fulfill all of its debt with the inflated currency.

Thus, This is How Inflation Works….!!!!!

Zimbabwe HyperInflation: How Inflation Works?

Person is carrying literally Billions of Zimbabwe Dollars. But the real Value of all of these Money is just few Dollars….

Zimbabwe Dollar Denominations from 5 dollars to 250 Million Dollars

10 Million Zimbabwe Dollars

3 Eggs are worth of 100 Billion Zimbabwe Dollars

10 US Dollars = Billions of Zimbabwe Dollars. Person showing US $ 10 Bill in one hand and Billions of Zimbabwe Dollars in the other

Child Carrying literally Billions of Zimbabwe Dollars in one hand

Person having a loaf of Bread in one hand and literally Billions of Zimbabwe Dollars in the other Hand. 1 Loaf of bread is worth of Billions of Zimbabwe Dollars.

100 Billion Zimbabwe Dollars Bill

Highest Denomination National Banknotes since 1900

Zimbabwe Hyperinflation: See How Inflation works and can affect the Economy adversely

Zimbabwe suffers the highest inflation rate in the world.

Zimbabwe has knocked 10 zeros off the country's hyper-inflated currency in year 2008, making 10 billion dollars one dollar.

So US $ 1 = 10 Billion Zimbabwe Dollars

Last week Gono introduced a new 100 billion-dollar note that is not enough to buy a loaf of bread.
Gono said on Aug. 1 2008 the bank will issue a new 500-dollar bill equivalent to 5 trillion dollars at the current rate.

This is the effect of Hyperinflation.

And US Government has recently printed US $ 1.2 Trillion in the Economy. Now just think that what will happen if the US Economy slips into Hyperinflation?….!!!

If US Federal Government & Central Banks around this world won’t stop printing Money, than this can happen to our Economy also…!!!!

BEWARE WORLD ECONOMY BEWARE. THIS CAN HAPPEN WITH ANY ECONOMY IF WE DON’T STOP PRINTING MONEY…!!!!

Useful Reading -

01) CBSNews.com – Inflation Fears Grow after Fed prints $ 1.2 Trillion

02) CBSNews.com – You Can’t inflate a Burst Bubble

03) CBSNews.com – Zimbabwe to Slash Value of Currency

Inflation Beating Assets

Right now the Indian Economy is in the Deflation, but the rate at which the central banks and government all around this world are printing money, the world economy will experience hyperinflation very soon.

So Which are the Inflation Beating Assets to own?

Well, it is very important to beat the inflation because the inflation will erode the purchasing power of your money over the time. Here are the Inflation Beating Assets.

01) Gold -

Traditionally the Gold is the Inflation Free asset. It is the Best hedge against Inflation since last more than 400-500 years. So if you invest you money in Gold, it will be inflation Free. But at the same time Gold is not for Capital Gains. If you want a Capital Gain from your Money than Gold is not for that.

02) Equity -

In the Long run, Equity is the Best Asset Class to protect your money from Inflation and Tax as well as it will provide you handsome Capital Gains. Equity is the Highest Return Giving Asset Class than any other Asset Class in this world.

03) Real Estate -

Real Estates can also protect you money from Inflation. Yes, this is true. Even though right now there is a subprime mortgage crisis and Real Estate Bubble Burst, It is one of the Best asset class to beat the inflation. I am talking about Rental Properties. Rental Income will increase year by year according to Inflation.

04) Private Business -

If you own your own Business than your Private Business is also a Best Asset that can protect your Investments against Inflation. Say for Example, take the example of this Blog. This Blog is my privately owned Business which is the best hedge against the Inflation.

So own the above Assets during the time of Inflation, your wealth will be best protected against the Inflation…!!!

Is One Crore Enough to Retire?

Recently a reader has asked me that, “Is One crore Enough to Retire?”

Well, the answer is – Of course Yes. One Crore is more than enough to retire if you are NO MORE after 2020. In other words, today is August 2009 and if you are going to live for only next 10 years than 1 Crore if enough to retire.

But if you think that you are going to live beyond 2020 than 1 Crore rupees is not at all enough.

Do you know Why? Well, It is Because of Inflation & Tax.

Both the Inflation & Tax are the silent Money Killers. And both of these factors erode the purchasing power (Value) of your Money very silently without noticing by you over the time.

See this is how it works. Say for Example, Inflation is 10% per year and you have Rs.100 in your pocket today which earn 8 per annum interest rate than after 1 year, you will have Rs.108 in your Bank Account but the purchasing power of that Rs.108 will be that of Today’s Rs.98 only. Thus Inflation has eroded Rs.2 Value of your Money without noticing you.

Actual Return = Return offered by Asset – Inflation – Tax

So in our scenario Actual Return = 8% – 10% = –2% (Negative Return) and on the top of this it is taxable.

Now let us discuss the real Scenario. Today you have Rs.1 Crore right? Now you want to retire so you will invest this money in the Bonds or Fixed Deposits which will give you 8% per Annum return. So you will earn Rs. 8 Lakh per Annum from this Rs.1 Crore from today right?

Now you will have a Cashflow of Rs.8 Lakhs per Annum every year. But remember it is taxable at the rate of 30%. So you will have to pay Rs.2,40,000 tax from this Rs.8 Lacs. So you will have Rs.5,60,000 on your hand after deducting the tax right?…. (Well, Actually this is the gross tax deduction example because Tax-Free Bonds offer 6.5% return per annum. So In reality if you have Rs.1 Crore than you will have Rs.6,50,000 post-tax return).

Now you have Rs.6.5 Lakhs of Post-Tax Income for rest of your life. But suppose if Inflation is 5% per Annum than the purchasing power of your money will be reduced every year and after 2020, you will have to again go back to work if you have just Rs.1 Crore in FDs or Bonds because Rs.6.5 Lakhs of Income will not be able to maintain your today’s life style.

But if you have Invested this Rs.1 Crore in your own Business than even after 50 years from today also, you will have a enough cashflow to maintain your life style. So it is advisable to invest this money in your own Business rather than in Bonds and FDs.

Benefits of Investing in Bonds

Many people have asked me the Benefits of Investing in Bonds. Well, There are basically 2 main benefits of investing in Bonds.

01) Asset Allocation &

02) During the time of Deflation

First is Asset Allocation. Any Portfolio Must have combination of Assets which have negative correlation. Equity & Debt (Bonds) have negative correlation means when Equity market goes up, the Debt market goes down and vice versa. So having 2 or more different Asset Class can provide a stability to your over all portfolio in any market and that’s why an Investor should Invest in Bonds.

Second advantage of investing in Bonds is during the time Deflation such as current time in India. Right now Indian Economy is in Deflation of –1.54%. Deflation means Negative Inflation. Inflation means the purchasing power of your money is reducing because goods and services in the economy are getting costlier day by day. While Deflation is reverse of Inflation.

There is an old saying that, “It is better to be a Lender (Bond/Debt Holder) during the time of Deflation rather than a Borrower.”

Now, there is a Logic behind the above saying. Your actual return from your any Asset = Return offered by that Asset – Inflation.

Now, Suppose Equity gives you 20% return per annum and the Inflation is 5% than your Actual return is 20-5 = 15%.

Say for Example if Bonds give you 8% return & the inflation is 5% than your Real return is just 3%.

Now let us discuss the scenario of Deflation. Suppose Deflation is 1.5% and Bonds are offering you 8% per annum return than your actual return is 8 – (-1.5) = + 9.5%

Understand the Logic….??

This is why you should hold Debt (Bonds) during the time of Deflation. Suppose if today you invest in Bonds than your actual return is + 9.5% even though on paper you get only 8% return.

This is the time of Deflation in Indian Economy so everyone should increase the Debt allocation in their Portfolios…….!!!!!!

Best Stocks to own During Inflation

Which are the Best Stocks to own during Inflation? Well, The answer is Large Cap Stocks & the Stocks of Fundamentally Strong Companies.

Large Cap Stocks are very much stable during any kind of market conditions. So even though there is high inflation, stocks will outperform the any other Asset Class. Another stocks which are very much stable during the time of Inflation are the stocks of fundamentally strong companies. Which feel very less heat of high inflation.

During the time of high inflation, it is advisable to hold the funds with large cap stocks allocation. Because the large cap stocks provide the stability to your portfolio even during the time of recession. And that’s why it is advisable to increase the large cap stocks allocation during the time of inflation.

This is why Investors are advisable to increase the large caps in your portfolio.

Assets to avoid during Inflation

There are some Assets which you should avoid during the time of high inflation. Because owning these Assets during the time of inflation will ultimately reduce your wealth.

The following Assets you should avoid during the time of high inflation -

Well, the logic behind not owning the following assets is that, during the time of high inflation, the following assets will give negative actual return. Real Return = Return by Asset – Inflation. So if the Bank Fixed deposit is giving you 10% per annum return and the inflation is 12% than it means that your actual return is – 2%. (Negative).

01) Savings Account – Because they just offer 3-4% per annum return. So during the time of high inflation, they will turn in to negative return giving assets.

02) Bank Fixed Deposits – they offer anywhere between 6-10% per annum return so if the inflation is above 10% than you should avoid this Asset class

03) Government Bonds – offer fixed 8% return per annum so if the inflation is more than 8% than it will turn into negative return producing asset. So you should avoid it.

In short, during the time of high inflation, you should avoid All the Fixed Return Giving Assets which includes, NSCs, KVPs, Bonds, FDs, PPF, Postal Savings and any other fixed income giving asset. Because the actual return from these Assets will turn into negative during the time of High Inflation and make you poor….!!!!

India in Deflation

Today Finally the Indian Economy Slips into Deflation (Inflation Below Zero.) Inflation at the week ended June 6, 2009 came in at – 1.6%.

The annual rate of inflation, calculated on a point-to-point basis, stood at -1.61% (provisional) for the week ended June 6 as compared to 0.13 % (provisional) for the previous week ended 30 May and 11.66% during the corresponding week of the previous year.

So What it means to you? You will see this Information everywhere around you now onwards. You will see this Information on News Channels, News Papers, Internet, Finance Websites, Day-to-Day talking and every where.

But What does it mean to you?

Well, I will teach you what does it mean to you and now what should be your Investment Strategy?

Remember the Golden Rule of Deflation, “During the time of Deflation, It is always Better to be a Lender (Bond Holder) rather than the Borrower (Debtor).”

So I will give you 2 Rules from this Golden Rule -

Rule: 1 Get out of Debt as early as possible anyhow -

Deflation means the time when Money becomes Asset. Usually Because of Inflation, the purchasing power of your Money reduces over the time. But during the time of Deflation your Money appreciates in its value because Goods & Services in the economy get cheaper.

So being a Borrower during the time of Deflation is a Fool’s Idea. Cut down your Credit Cards, Stop Borrowing More Money & Get out of Debt any how.

Rule: 2 Be a Lender (Bond Holder) -

Instead of being a Borrower, Be a Lender. During the time of Deflation, Bonds & Fixed Income Instruments are the Best Investments. Because Negative Inflation means Positive returns on your Investments. So reshuffle your Portfolio and Increase the Asset allocation of Debt in your Portfolio.

So This is a Deflation Time. Act on the above advises.